Deal-making picks up after a long, deep freeze

In the first month of the new year, mergers and acquisitions seemed to be all anybody wanted to talk about. Sara Lee Corp. was moving to break itself up and sell off the pieces; Fortune Brands Inc. was looking for buyers for its golf and home products units, and packaging and paper company RockTenn Co. agreed to buy Chicago rival Smurfit-Stone Container Corp. in a $3.5-billion deal.

After a recovery in 2010, when worldwide M&A volume rose 25%, most local investment bankers expect deal totals to jump another 10% to 20% this year. Cheap money, an improving economy and the emergence of private-equity bidders after a long sabbatical have combined to boost the outlook for transactions. There hasn't been so much optimism in the marketplace since the roaring 2006-07 period.

Mason Wells Inc., a Milwaukee private-equity firm that recently raised a $525-million buyout fund, acquired closely held Gurnee personal-care specialist Paris Presents Inc. for an undisclosed price on the last day of 2010.

Kevin Kenealey, a Mason Wells managing director, says his firm had trouble raising money a year ago. But conditions have turned around.

“We've raised new capital, and we've also got debt financing available to us now,” he says. “Companies like Paris Presents are enjoying improving fundamentals and should continue to improve in 2011, which makes them attractive to us. That's why we think this will be a very strong year for M&A.”

In Illinois, transaction volume rose 36% last year from the year before to 634 deals. The announced value of those deals soared 60%, to $64.99 billion, according to FactSet Mergerstat of Norwalk, Conn. But the increase is even more significant if the single biggest transaction of 2009, the Kraft Foods Inc. takeover of Cadbury PLC for $19.14 billion, is subtracted from the survey. Do that, and 2010 deal volume multiplied about two times.

“No matter which way you slice it, 2010 was a very strong year for M&A,” says Steven Bernard, director of M&A market analysis at William Blair & Co. in Chicago. “On a national basis, this was the first time in three years that deal volume actually rose.”

Mr. Bernard is forecasting M&A volumes will rise at least another 10% this year, with American companies in pursuit of opportunities that give them entree to markets such as China and Brazil. Buyers will be more selective in looking at Europe, he adds, with Germany and Great Britain likely to be the favored markets. Mr. Bernard also anticipates more hostile takeover attempts this year.

“There are a large number of stocks that haven't kept up with the overall stock market in recent months, and there will be investors looking to take advantage of that,” he says.

Mark Shanley, associate dean of the college of business administration at the University of Illinois at Chicago, notes that corporate America is sitting on nearly $2 trillion in cash. “With interest rates so low, that cash isn't earning anything right now,” he says. “So what else will corporations use it for? Most don't want to build new factories or hire more workers at this point. Mergers are the most obvious place to invest that money.”

The Chinese will look to acquire more U.S. firms this year, Mr. Shanley predicts. He also believes the new health care law, if it survives Republican challenges, will help fuel a consolidation trend among medical providers.